Everything You Need To Know About Assignment Sales

June 28th, 2022 / Investing

Housing is in critical demand in Toronto and the GTA, and builders are hard at work trying to keep up. With so much pre-construction happening, assignment sales are becoming more popular.

Assignment sales are an excellent vehicle for anyone who wants to break into the real estate market and is not in a rush to move. They can also be complicated to the point of intimidating.

This article will tell you everything you need to know about whether an assignment sale is right for you.

The first fact that might surprise you is that purchasing an assignment isn’t buying a property at all. You’re simply buying the contract, which gives you the right to purchase the unit once construction is complete.

Why Buy Pre-Construction In The First Place?

Who doesn’t love the idea of a brand new house where you’re the first person living there. Everything is spotless and pristine, and you have the latest technology in everything. It will be a long time before you have to worry about worn-out counters, floors or chipped paint.

In fact, it will be a long time before you even get to walk in the door, because the unit hasn’t even been built yet. Many pre-construction homes are sold before construction even starts!

I have helped investors buy and sell properties for years. Here are some of my other posts that you may find helpful:

Why Sell Your Assignment?

It can take years before you can finally move into a pre-construction home. During that time, a lot can change. You may find a new job in a different city. You could get married or divorced or start a family. Or perhaps you simply decide that you don’t want the unit anymore.

Some purchasers are investors who never intended to complete the transaction in the first place. The only intention was to sell the contract for a profit before the final construction is completed.

Whatever the reason, the condo no longer suits your lifestyle. Selling the assignment can give you the funds you need for your next step.

What Makes Assignment Sales So Complicated?

Traditional real estate deals involve only one transaction, which can get complicated enough. Negotiations take place between two parties, the buyer and the seller. Both sides want a fair deal, but rarely agree on what “fair” means.

With an assignment sale, there are two transactions to complete, the initial purchase of the contract and the final closing when the new owner can move in. Assignments also bring the builder into the mix, involving three parties in the transaction.

Every builder has different policies regarding assignment transactions. Some builders don’t allow them at all. Those that do allow assignments will have a list of guidelines you must abide by when selling the rights to the unit.

The Pros and Cons of Buying An Assignment

Buying an assignment has many advantages, including:

Eliminating the risk of cancellation. When you buy pre-construction, it can take years before the project even starts, and delays can happen. In the worst-case scenario, the project can get cancelled, leaving you to start over from square one. When you buy an assignment, you can get in closer to the completion date and you don’t have to wait nearly as long to move in.
Buying an assignment can save money. Since the market almost always rises in value, you’ll usually pay less when you buy your unit before construction completes.
You can sell your assignment at a profit. If property values rise significantly, you can consider reselling the assignment and taking the profit.
You get a beautiful, brand-new living space with a full Tarion warranty.

Of course, buying an assignment also comes with its share of challenges and risks.

You will need a significant amount of cash upfront. When you buy an assignment, the seller will want to recoup their full deposit, plus a profit as property values rise. You need to pay these funds upfront, and you can’t roll them into your mortgage. There will also be closing costs of 3-5% of the total sale price, which you will have to pay upon moving in.
Delays can still happen. You won’t have to wait as long as when you buy an initial contract. However, building delays can happen at any point during the construction. In the meantime, you’ll have to arrange for temporary accommodations while you wait.
You could lose money. If you’re buying an assignment as an investment, there is always a slight chance that the market could take a tumble. If you cannot carry the cost of holding the contract, you may have to sell it at a loss.
Developmental fees are in excess of closing costs. Plus, there may be a final portion of the deposit due on moving in.
For condo assignments, there are occupancy fees. This is similar to paying rent to the builder once the construction is complete and before the building is registered.
If you do not plan to live in the home, you will need to pay the HST. The builder will not be eligible to get the HST rebate if you decide to rent the unit as well during interim occupancy.
Your bank may not finance the entire purchase. Some banks appraise the home at the price the original owner paid. This could leave you with a larger portion to pay at closing that may not be covered by your mortgage.

The Pros and Cons of Selling An Assignment

What if you’re the original buyer and want to cash out of your investment? Selling an assignment also has its share of advantages and disadvantages.

The downsides of selling are a smaller pool of buyers due to the complexity and the amount of cash needed upfront. The rules around assignments can scare some potential buyers away.

Even if your original agreement allows for assignment sales, most builders still have to approve your transaction before you can continue. Once your assignment sale is approved, there are several advantages:

You will save on closing costs. Since you’re not moving into the unit, you won’t have to pay land transfer taxes and other closing fees.
You can earn a profit. If the market goes up after your initial purchase (as it almost always does), you stand to make a profit. As an investor, selling assignments allows you to earn money without the hassle of dealing with tenants.
Quick turnaround times and the opportunity to reinvest. Since you don’t have to wait until the building is complete, you can sell your assignment at any time and take the profit.

Assignment sales can be complicated but are a great way to get started in the market as a homeowner or an investor. Your best bet is to consult with a real estate agent with experience who can guide you through each step in the process.

Are you thinking about taking the next step as a real estate investor? Asking questions is always free. Reach out right here, and I will happily point you in the right direction.